Good day, and welcome to the Fluent, Inc. Third Quarter 2020 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Ryan McCarthy. Please go ahead.

Good afternoon, and welcome. Thank you for joining us to discuss our third quarter 2020 earnings results. Joining me on today's call are Fluent's CEO, Ryan Schulke; and CFO, Alex Mandel. Our call will begin with comments from Ryan Schulke and Alex Mandel, followed by a question-and-answer session. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit our Investor Relations page on our website www.fluentco.com. Before we begin, I would like to advise listeners that certain information discussed by management during this conference call will contain forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made during this call speak only as of the date hereof. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These statements may be identified by words such as expects, plans, projects, could, will, may, anticipates, believes, should, intends, estimates and other words of similar meaning. The company undertakes no obligation to update the information provided on this call. For a discussion of the risks and uncertainties associated with Fluent's business, we encourage you to review the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During the call, we will also present certain non-GAAP financial information relating to media margin, adjusted EBITDA and adjusted net income. Management evaluates the financial performance of our business on a variety of indicators, including media margin, adjusted EBITDA and adjusted net income. The definition of these metrics and reconciliations to the most directly comparable GAAP financial measure are provided in the earnings press release issued earlier today. With that, I'm pleased to introduce Fluent's CEO, Ryan Schulke.

Thanks, Ryan, and good afternoon, and thanks to everyone for joining us today. As we continue to navigate this challenging environment, I couldn't be more proud of our entire colleague base. As a leadership team, we're grateful for our team's resilience and perseverance, now 8 months into this remote work environment. The strength of Fluent is our culture. As once again, we were recognized as one of New York's Best Places to Work. Such acknowledgment is a great source of pride even more so during these difficult times. We also recently announced the launch of our business empowerment program, which will support minority and women-owned businesses with their direct-to-consumer digital marketing efforts. And as we continue to traverse a challenging regulatory environment with a heightened scrutiny by regulators and elected officials of some of the major players in the technology industry, Fluent remains diligent in enhancing our brand equity, improving our own standards for the benefit of our clients and consumers as well as our shareholders. Today, we're pleased to share strong results for the third quarter with year-over-year revenue growth of 21%, media margin growth of 39% and adjusted EBITDA growth of 167%. We believe this performance is significant and that it reflects innovation and growth during this challenging macro environment as well as the successful lapping of last year's challenging third quarter. For context and thinking about the potential for Fluent's market opportunity, I've spoken about the notion of our flywheel. To the extent we can generate higher monetization or returns on media spend through levers such as product innovation, analytics and technology. We can then reinvest some of that upside into tapping incremental media supply and accessing new markets. This, in turn, can yield further growth, incremental profits and additional investment capacity. During this quarter, through effective…

Thanks, Ryan, and good afternoon. We're pleased to report our results for the third quarter today. As Ryan spoke about, the quarter was marked by innovation and efficiency-driven growth. End consumer-facing promotions experienced favorable engagement, which coupled with enhanced ad serving logic yielded strong monetization on our platform. The company generated $78.3 million revenue in this quarter, up 21% year-over-year, albeit in comparison with a challenging quarter last year. Revenue was also up 9% sequentially. The fact that's underpinning revenue growth exemplified at the media margin level with $29.7 million in the quarter, reflecting growth of 39% year-over-year and representing 37.9% of revenue. This relatively higher margin profile as a percent of revenue relates to the increased monetization or return on media spend that Ryan spoke to earlier. As a partial offset to the increased margin we incurred higher costs fulfilling rewards earned by consumers. Fulfillment cost does not capture the media margin, but it is captured in our GAAP gross cost of revenue. That said, the increased media efficiency outweighed the incremental fulfillment cost and our cost of revenue as a percentage of revenue decreased in Q3 as compared with 69% in last year's Q3. Our operating expenses on a GAAP basis, comprising sales and marketing, product development and G&A, grew in aggregate by 1.3% or $250,000 year-over-year [Technical Difficulty] $0.1 million. Within that mix, we continue to invest in product development in support of innovation and efficiencies like those advanced in the quarter. Our G&A line includes certain litigation and related costs of $2.7 million in the quarter inclusive of a $1.5 million accrual established this quarter as a loss contingency in respect of the New York Attorney General matter, which we first disclosed in our Q1 2019 10-Q. G&A also includes $650,000 of noncash accrued compensation expense…

[Operator Instructions]. Our first question today will come from Jim Goss with Barrington Research.

Several questions. First, given the steadily increasing number of streaming services, it seems over the course of the year and before this year. Does more and more entrants into that space provide you with more opportunity or more competition? I wondered if you could navigate that for us?

Yes. Jim, it's good to hear from you. And as a performance marketing company, not an agency, the fact that more and more players are coming into this space is a positive thing for us. It gives us more products and services to offer to our consumers more options and choices, which is a good thing. And ultimately, it helps really flesh out that marketplace effect that we've spoken about. So it's a very positive thing for us.

Okay. And you also mentioned gaming, and you were referring more to apps. But what type of gaming are you referring to specifically? Is it on-betting gaming? Or is it - does it include that sort of thing as well?

There may be some of the game of skill type apps in there, but predominantly, these are more social games. They're light. And we have a variety of different gaming apps that we're working with right now. So I think you may be referencing the more game of skill type category. That's something that those guys are in customer acquisition mode and growth mode. So we see some of that in terms of our client base, but also a wide variety of gaming apps.

So it sounds like this would apply to anything that is subscription-based or transactional base. And I wonder if there are a lot of other categories you could enter that would broaden your applications as well.

We absolutely believe that. And as we kind of - we expand our - the channels that we're operating in, some of the ad products we delivered, we spoke of our contact center capability, the ability to drive inbound calls, things like that. There are really many different types of product applications that you can apply a performance marketing model against. And that's really something that we're focused on at this point is expanding the amount of product and service categories that we're able to operate in and match our consumer base with.

Okay. Then the 5% of your business that's international, I think, mainly U.K. and what you might want to do in Canada? Are they going to target the same sort of areas that you're already involved in, in the United States?

Yes, absolutely. In the U.K., we've been able to demonstrate for - that the dog can hunt, so to speak. And it's something that we anticipate will be something we'll have success on. In other countries, there may be cultural differences here and there that we have to respond to in order to be successful at the type of scale we are here in the U.S. But we ultimately believe it's the same model that's driven all the growth and success we've seen here domestically.

Okay. And one last one for now. The - should the targeted seasonal revenue pattern be one of sequential improvement over the course of the year. I was just looking at the last several years of patterns, and there wasn't a consistent pattern over them - over the course of those years. And I'm wondering if that is really what you're seeking to generate?

Yes. We're a growth company, and I can have Alex comment to some of the details and the financials but you will see some occasionally abnormal growth from time to time with the business. We noted last Q3 was a challenging quarter, but in 2017 and 2018, Q3 saw a lift over Q2. Generally, the back half in Q4 specifically tend to be strong for us. So you can see some macro patterns, if you were to look across a longer time frame than what we may have publicly available. But ultimately, I can have Alex comment on any of the more specifics. But the business is a growth business, and we do tend to have certain periods that tend to be outsized a little bit in terms of the growth.

Okay. Yes, if Alex wants to go ahead or we can cover it in a subsequent discussion.

Sure. I was just going to [Technical Difficulty] Ryan shared and what you observed, which is that historically, Q4 has been sequentially stronger than Q3. We simply noted on the earnings release upfront, some of the uncertainties that are present in this year's environment, which make this simply a different type of a year than other years. At the same time, we're cautiously optimistic at this point.

And our next question will come from Maria Ripps with Canaccord Genuity.

Great. I just wanted to follow up on your media and entertainment vertical. So it seems like you expect this vertical to remain your most significant growth driver sort of going forward, helped by streaming services and mobile gaming. I guess, how diverse is your revenue from the sources? And are there any sort of revenue concentration issues?

Maria, it's great to hear from you. And to answer your question directly, no, we don't have any specific concentration issues, no 1 particular client, north of 10% to my knowledge. And really, we have been enjoying the benefits of a vast array of products and services that our consumers are discovering on the platform. And really that's been a testament to where we're seeing a lot of growth. So no particular concentration issues at this time.

Got it. And just maybe another question here. Can you give us an update on your structural profitability? You had really great flow through this quarter from revenue upside to EBITDA upside. Does this change how you think about the potential for margins over the next year or two?

Alex, I think you're on mute.

Maria, it's Alex. Thanks for the question. Great to hear from you as well. As we think about margin profile over the next year to 2 years, let's say, I don't think that the experience this quarter necessarily and generally changes our outlook. We tested some new promotions that we spoke about that were effective. And at the same time, we're continuing to invest into areas that we see potential opportunities from. So I think that no material change to our outlook at this point.

Our next question will come from Bill Dezellem with Tieton Capital.

What would you like to share here about your plans relative to the higher cost debt that you have on the balance sheet?

Bill, I'm going to let Alex field that one directly.

Yes. Thanks for the question. You noted that our credit facility is currently priced at LIBOR plus 7, and suffice it to say that we continue to focus on opportunities available in the market and review them regularly, and we'll update publicly if there are any changes to that.

Great. And then, Ryan, would you please expand further on the comment you made in your opening remarks about the flywheel? And I know you did, kind of, give an example later in the discussion. But I want to give you the opportunity to really expand on that, if you would, please?

Yes, absolutely. For lack of better term, Fluent spends money to make money. We go out, partner with many of the major media owners' platforms to go out and traffic our properties. Our clients are on the other end of our digital media properties on a pay-per-performance basis, which makes their campaigns extremely scalable for us. So the flywheel really has to do with that pent-up demand. The fact that our clients want more of what we're delivering, simply since they can see the ROI. So predictably and essentially really what all we need to do to grow is go out and find more channels in which to traffic those digital media properties and appropriately position our clients offerings within them. So there's many ways to skin that cat, so to speak, and we're really focused on going out and ensuring we have a vast variety of products and services and clients that deliver those products and services that is, in essence, our demand side of our house. And in turn, that enables us to go out and access more supply, leapfrog competitors to go out and outbid for traffic on, call it, a major platform like Facebook or Google or any of our other media partnerships websites and apps where we acquire audiences from, in essence. That is the flywheel.

Great. And then lastly, the restructuring and severance cost that was referenced, I think, $565,000. Would you please detail that?

Alex, are you on mute?

No.

Okay. Got you. Yes, we can hear you.

We can hear you now, Alex.

Great. Could you please repeat the question, though, the $565,000 in relation to?

The restructuring and severance costs. What was it? And I'm really asking the question in the spirit that you had a great quarter, so congratulations. But it's a little unusual to have restructuring and/or severance during a great quarter. Usually, companies save that for a bad time.

Sure, of course. In the ordinary course, we have people that joined the company and that depart the company and in different circumstances, we have different agreements in terms of severance and so forth, but nothing major or material per se to discuss further on that one. But thank you for reiterating the question.

And ladies and gentlemen, this will conclude our question-and-answer session and also concluding today's call. We'd like to thank you for attending today's presentation. And at this time, you may now disconnect your lines, and have a great day.